‘Super’ IT managed service providers will proliferate and become targets for investors

We expect M&A activity to be affected in the following two main ways. 

• Medium and larger MSPs will look to acquire capabilities in high-growth areas such as cyber security and artificial intelligence. This could be an effective way to bolster capabilities without having to contend with shortages of skills and capabilities that could hinder an organic strategy. An ecosystem of ‘super MSPs’ with a broad range of capabilities covering connectivity, communications, cloud, IT and cyber security is therefore likely to emerge with increasing frequency. 
• These ‘super MSP’ platforms will become a target for private equity investors. These MSPs are likely, through a combination of organic and inorganic growth, to outgrow mid-market investment and attract large capital investors. 

Tier 2 cities will become the next big hubs for data centres, driven by AI and strategic advantages 

The demand for data centres is projected to more than triple globally by 2030. Tier 2 cities are emerging as the next major hubs for data centres because of power constraints in Tier 1 cities. These cities offer several investment advantages that make them attractive alternatives to the already crowded Tier 1 cities.

Many Tier 2 cities have better availability of power and land, and also present opportunities for sustainable development, including the use of renewable energy sources and green building practices. 

Advances in infrastructure and technology allow Tier 2 cities to increasingly meet the specific requirements of AI technology such as high computational power and efficient cooling systems. 

Additionally, the overall cost of operating data centres in Tier 2 cities is generally lower compared to Tier 1 cities. This is because real estate costs, labour expenses or local governments are offering financial incentives, including lower taxes. However, some of these cities may face challenges in procuring the right talent and necessary operational teams.

These factors position Tier 2 cities as the next big hubs for data centres and a focus for future data-centre investments.

Starlink is reaching an inflection point, which will drive more M&A and refinancing in satellite communications

In 2022, we predicted more M&A in satellite communications (satcom). What followed was the merger of Viasat/Inmarsat, Eutelsat/OneWeb, Yahsat/Bayanat, and a deal was announced between SES and Intelsat more recently. Eutelsat has also sold its ground segment to EQT.

Yet, with Starlink just reaching an inflection point and global widespread adoption and with Amazon Kuiper just on the horizon, we believe the reorganisation of the satcom sector and of its supply chain has only reached a half-way point. Many satcom operators have seen their value plummet and are heading into survival mode or will soon face large debt refinancing. Others are already rapidly expanding into new areas in the hunt for value and long-term competitiveness. Such repositioning needs to happen at a time of technology and market uncertainty and opportunity. It needs to be done before the financial impact is sorely felt. Speed is critical, and we therefore expect to continue seeing more M&A deals in satcom in 2025.

Digital infracos will look to replicate the yieldco business model beyond data centres

The data-centre yieldco model is gaining further traction as interest rates are set to decrease and vendors are learning to structure the deal perimeter in a way that works for risk-aware investors. As the business model matures, investors will find comfort in this investment model and will look to complement their investment portfolios with similar assets across other digital verticals. 

Digital infracos and their shareholders will investigate innovative deal structures to involve other (non-data-centre) assets within the digital infrastructure stack into stabilised (yieldco-like) special-purpose vehicles (SPV) to meet the demand from risk-aware investors. There could be an opportunity for fibre businesses that have demonstrated a track record in take-up and low churn (for example, maybe carving out into the SPV more mature roll-out cohorts with higher take-up). Digital real estate businesses (that is, land leases, switches/nodes) are a natural fit for this investment model. Mobile tower assets could provide less sizable benefits as towercos are intrinsically yieldcos already, but the yieldco model could be relevant for in-building systems and small-cell businesses.

Cyber security has a vital role to play in the success of a deal

Companies with robust cyber-security measures will be more highly valued and face fewer regulatory challenges, while those with weak security practices may struggle to close deals. This will make financial sponsors more conscious of the value of having a robust review of cyber-security processes and integration strategies during the due diligence process.

This emphasis on cyber-security considerations during M&A is driven by the increasing frequency and sophistication of cyber threats. As these become more efficient and damaging, the potential risks associated with integrating a company with a weak cyber-security posture grow exponentially. Regulatory bodies are also tightening their scrutiny of data protection and national security (as demonstrated in the EU’s NIS2 Directive or the Cyber Resilience Act, for example), thus making robust cyber-security practices essential for getting the green light from the relevant authorities. Additionally, the financial and reputational damage from a cyber incident can be immense. Therefore, the selling side should do pre-deal cyber work to increase their value by protecting their assets, and the buying side should ensure their targets have efficient defences in place. This extended focus on cyber security helps to protect assets, maintain stakeholder trust and ensure a smoother integration process.

MNOs will carve out their IoT business to extract value and foster growth

Mobile network operators’ (MNOs’) IoT connectivity revenue is expected to continue to grow at around 10% per year worldwide for the next 5 years, but penetration is lower than market players had hoped for. IoT accounts for between 2% and 5% of mobile revenue for most MNOs. IoT sales cycles have proven much longer and more complex than those for other forms of mobile connectivity, while customer requirements can be specific and difficult to satisfy. 

As a result, an increasing number of MNOs are questioning their approach to IoT and considering different options. Some larger MNOs, such as Vodafone, are carving out their IoT divisions. These separate IoT companies could attract external investors and become vehicles for acquisition, buying smaller players to consolidate market share. Meanwhile, MNOs with fewer than 5 million connections (and possibly those with under 10 million) are likely to struggle to compete with global players. In 2025, we expect some of these MNOs to partner with other IoT players, such as specialised IoT mobile virtual network operators (MVNOs), to reduce costs and use their expertise to boost sales, but we believe that a fair share of MNOs will divest (carve out) their IoT divisions, which will become ideal candidates for consolidation by larger players.